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Corporations Flashcards

1
Q

What is a promoter?

A

The person responsible to solicit investors for a corporation, write the charter, and start the business

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2
Q

What duty does a promoter have to the corporation he is forming?

A

A fiduciary duty – he cannot engage in self-dealing (i.e. profiting at the corporation’s or at shareholders’ expense), and he must turn over any such profits he gains to the corporation

Required to fully disclose his activities to anyone with an interest in the corporation

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3
Q

Is a corporation liable for contracts made by the promoter before the corporation comes into existence?

A

No, since a nonexistent business cannot ratify the contracts

A corporation has the choice of “adopting” the contracts after coming into existence, however

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4
Q

What are different ways a corporation can adopt contracts made by its promoter?

A

(1) state statute – forced by law
(2) express agreement, established after incorporation has taken place
(3) impliedly – accepting a contract’s benefits and thus adopting its liabilities

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5
Q

Does a promoter retain any liability if his corporation adopts his contracts?

A

Yes, he is personally liable unless…

  • the contract states that the promoter is not personally liable
  • novation occurs, the creditor agreeing to form a new contract with the corporation
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6
Q

With what legislative act does the promoter need to comply?

A

Securities Act of 1933 – requires him to file registration statement with SEC (if securities will be offered in interstate commerce) and to provide possible investors with a prospectus

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7
Q

What is the main statutory requirement for creating a corporation?

A

Executing and filing the articles of incorporation (a.k.a. corporate charter, or certificate of incorporation)

Must be signed by incorporators, who usually are the same people as the promoters

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8
Q

What must be included in articles of incorporation?

A
  • corporation name
  • purpose
  • authorized stock
  • location of main office
  • number of directors
  • address of registered agent for service of process
  • capital structure
  • duration
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9
Q

What do some states further require with the articles of incorporation?

A
  • a minimum capital contribution
  • officers elected by the board of directors
  • bylaws
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10
Q

When does a corporation officially come into existence?

A

According to common law, not until the state office issues a certificate of incorporation following the articles’ filing

According to modern custom, it begins when the filing occurs

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11
Q

What is usually the first thing done after incorporation?

A

Creating bylaws (if they were not already required to be created)

Except for particular states, they do not need to be filed

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12
Q

Who can adopt and revise bylaws?

A

The incorporators or board of directors can adopt them

The shareholders or board of directors can revise them (unless this power is restricted to shareholders, e.g. by the articles)

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13
Q

Which corporations can act without bylaws?

A

Close corporations, i.e. corporations with a small number of shareholders who usually participate in running the business, and which can decide things without a board meeting

General bylaw info still must be included in articles or in an agreement among shareholders

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14
Q

What occurs if a corporation does not follow the proper procedure for incorporation?

A

Common law used to forbid them the status of corporation

This caused contract problems where third parties could choose not to perform, or could hold the shareholders personally liable – so other laws now deal with defective incorporation

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15
Q

What is the difference between a de jure and a de facto corporation?

A

De jure = the business substantially fulfills the incorporation process

De facto = the business does not substantially fulfill the process, but still can be protected in contracts it enters

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16
Q

What are the prerequisites for a de facto corporation?

A

(1) valid statute by which the business could have been legally incorporated
(2) corporate charter
(3) good faith attempt at incorporation
(4) good faith business dealings

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17
Q

What can the state do against a de facto corporation?

A

Challenge its status as a corporation with a quo warranto proceeding

Quo warranto = “by what warrant?” – questions the corporation’s claim to be a corporation

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18
Q

What is corporation by estoppel?

A

A situation where, if a third party agrees to a contract with a business that he truly believes is a corporation, then he cannot hold the shareholders personally liable (i.e. he must treat the other party as a corporation)

This occurs even if the other business is not a de facto corporation

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19
Q

What is a subscription agreement?

A

A contract to purchase shares at a given price

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20
Q

What is the problem with people who subscribe before incorporation?

A

There is essentially a contract without two parties, which is thus unenforceable

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21
Q

What are the different ways around the problem of pre-incorporation subscriptions?

A

(1) if individuals depend on others’ subscriptions as a basis for their own subscriptions, then they are enforceable among the subscribers
(2) the Model Business Corporation Act (MBCA) requires pre-incorporation subscriptions to be treated as irrevocable offers for six months

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22
Q

Can subscriptions be conditional?

A

They can be conditional on anything, but all subscriptions are implicitly conditional upon (a) the business being a de jure corporation and (b) the corporation fulfilling all relevant laws

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23
Q

For states that have minimum capital requirements (i.e. which require a certain amount of contributed capital), how is this determined?

A

By the fair market value of the capital

This is relevant because contributed capital can be in the form of property or services, not just money

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24
Q

What is treasury stock?

A

Stock that has been issued but then reacquired by the corporation – can be cancelled by the corporation, in which case the shares are treated as unissued

Does not include voting or dividend rights

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25
Q

What is watered stock?

A

Stock issued for less than par value

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26
Q

To what is a common stockholder entitled?

A
  • dividends
  • assets (in the event of liquidation)
  • voting rights (sometimes)
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27
Q

To what is a preferred stockholder entitled?

A
  • assets (for par value before common stockholders in the event of liquidation)
  • fixed dividends (before common stockholders)
  • voting rights (sometimes)
  • various others, depending on the preferred stock
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28
Q

What are different kinds of preferred stock?

A

(1) convertible = can be changed to common stock
(2) cumulative = entitled to fixed dividend payments each year; this accrues if dividends are not paid for a given year
(3) participating = share in any profit distribution given to common stockholders
(4) unspecified = entitled to fixed dividends (which do NOT accumulate), but no other profits

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29
Q

What is a stock’s par value?

A

The nominal value stated on the stock certificate – but stocks can be sold for any amount over par value

Par value for stocks is accounted for in the capital account (e.g. “Common Stock”), while any extra is accounted for in an Additional Paid-in Capital account

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30
Q

What is legal capital?

A

Issued shares x par value

This account is useful for paying creditors if liquidation occurs

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31
Q

What is the surplus of a company?

A

Earned surplus (i.e. retained earnings) + paid-in surplus (i.e. APIC)

Also equal to (net assets) - (legal capital)

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32
Q

Can corporations accept past services as consideration for issued stock?

A

Yes

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33
Q

How can stocks be transferred?

A

By endorsement and delivery

If endorsed in blank, delivery is sufficient to transfer stocks

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34
Q

Can corporations restrict the ways in which stock can be transferred?

A

Yes – e.g. a stockholder can be required to offer the corporation to repurchase the stock first before offering it to someone else

To be enforceable, these restrictions must be reasonable and overtly presented on the stock certificate

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35
Q

Under what circumstances would a stockholder recognize a taxable gain/loss from his purchase of stock?

A

If, after purchasing, he owns less than 80% of the total stock

This applies to groups of stockholders as well

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36
Q

How is the taxable gain/loss calculated for a non-controlling stockholder (i.e. <80%)?

A

Taxable gain/loss = FMV of stock - tax basis of money/property exchanged

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37
Q

Do corporations recognize taxable gains/losses for money or property contributed?

A

No

The new tax basis is the FMV of the property contributed

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38
Q

What is the difference between a domestic corporation and a foreign corporation?

A

Domestic = does business only in the state where it’s incorporated

Foreign = does business outside the state of incorporation

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39
Q

What is a professional corporation?

A

A corporation whose shareholders are all professionals (e.g. lawyers, doctors), who usually assume personal liability for their professional activity

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40
Q

Do insiders for a corporation (officers and directors) have a fiduciary duty towards stockholders?

A

They did not under common law – they were not required to disclose inside info except in face-to-face interaction

Now, insiders’ obligations are regulated by SEC Rules 10b-5 and 16b

41
Q

What does SEC Rule 10b-5 forbid?

A

It forbids fraud, deceit, and material omissions of fact that make statements misleading

42
Q

What does SEC Rule 16b forbid?

A

It forbids officers, directors, and >10% stockholders to buy and sell stock for a profit within a six-month period

43
Q

What are the corporation’s express and implied powers?

A

Express = whatever it is authorized to do by state law, articles of incorporation, or bylaws

Implied = whatever is reasonably necessary to execute express powers

44
Q

What powers are NOT able to be implied powers for a corporation?

A

(1) giving away assets at shareholders’ expense
(2) entering into a partnership
(3) lending money – though it can act as a surety if it promotes the corporation’s interests

(2) and (3) can be permitted by charter or statute

45
Q

Why are corporations ordinarily prohibited from entering into partnerships?

A

Because the partners who could control the corporation are not its elected officers (or agents)

46
Q

Who has the right to manage a corporation’s affairs?

A

The board of directors

Original directors are named in articles of incorporation; later ones are elected at shareholder meetings

47
Q

How can vacant director positions be filled in between shareholder meetings?

A

The board can select someone to fill the position

48
Q

Do directors need to manage the corporation along with shareholder influence?

A

No, they have a right to manage it without direct shareholder involvement, and they need not be shareholders themselves

49
Q

What is the minimum number of directors a corporation must have?

A

Used to be three, but now there is no minimum (besides one)

50
Q

How does an inside director differ from an outside director?

A

An inside director is an employee, officer, or shareholder who is also a director

51
Q

What is a corporation’s audit committee?

A

An independent committee responsible for the corporation’s audit work, both in appointing and overseeing any auditors – must approve all services (auditing or not) provided by an auditing firm

Must include at least one financial expert

52
Q

In what ways must an audit committee be independent of the corporation?

A

Each member must be independent in the sense (1) that he is unaffiliated with the company and (2) that he does not receive payment for consulting, advisory, or other services

Audit committee members can still serve on other committees, however

53
Q

What does an audit committee do besides oversee external auditors?

A

It oversees the whole financial reporting process, including internal control policies and accounting policies and principles

54
Q

How can directors be removed from their office before their term ends?

A

Older common law forbade their removal except for some good cause, e.g. fraud, but now a director can be removed at any time by shareholder vote

55
Q

Does a board meeting require the presence of all directors to make binding decisions?

A

No, only a simple majority (>50%) need to be there

Furthermore, unless the articles say otherwise, a vote of a simple majority of the directors present makes a decision binding

56
Q

Can binding decisions be made by directors without a meeting?

A

Only in some states – the directors must consent in writing and have the documents filed with the corporation’s minutes

57
Q

Can a board of directors delegate their duties to another committee?

A

Yes, they can delegate some (but not all) duties to an executive committee, though this committee must also be composed of directors

Examples of non-delegable duties: changing bylaws, declaring dividends

58
Q

Are directors personally liable for dividends that are wrongly paid out?

A

Yes, unless they acted responsibly upon the info they had

59
Q

Does a director have rights to be compensated for services he provides to the corporation?

A

Only if the bylaws specifically authorize it

60
Q

What is included in a director’s duty of due care to his corporation?

A

Must act with the care and skill of a prudent person in the circumstances, or else he can be held liable for negligence

61
Q

What is the business judgment rule?

A

Relates to the director’s duty of due care: reduces the liability of a director for negligence in matters of judgment, so long as he acted in good faith and did not commit “clear and gross negligence”

62
Q

What is included in a director’s duty of loyalty to his corporation?

A

He can have transactions with the corporation, so long as they are fully disclosed to (and approved by) other directors

Also must be unobjectionable to courts, or else the contract can be rescinded and the director held liable for any harms

63
Q

What is the corporate opportunity doctrine?

A

Relates to the director’s duty of loyalty: forbids a director from taking for himself a business opportunity that the corporation could take (not without giving the corporation a chance to act first)

64
Q

Do officers need to be distinct from the board of directors?

A

No – though they are appointed by the board, officers can also be directors

65
Q

How can officers act on behalf of their corporation?

A

Officers have an express power of binding the corporation to contracts, and otherwise they act as agents (with all the ordinary rules applying)

66
Q

How do the fiduciary duties of officers and directors compare?

A

They are the same

67
Q

What does the Sarbanes-Oxley Act require of officers?

A

(1) the CEO and CFO (or equivalent persons) must certify the annual and quarterly reports submitted to the SEC – and they must be free of fraud/falsity
(2) executive officers (for an issuing corporation) must have no incentive-based pay from selling stock in the 12 months before an earnings restatement

68
Q

Does respondeat superior apply to corporations?

A

Yes, they are liable for torts committed by employees within their employed activities

69
Q

What does “ultra vires” mean?

A

“Beyond the powers” – refers to acts done by a corporation which are unauthorized

Ultra vires acts are not illegal but are considered void or unenforceable

70
Q

Can a corporation or a third party claim the ultra vires doctrine in order to negate a contract?

A

No, it can be asserted only by the corporation’s shareholders, who can then (along with the state) sue the corporation for any harms caused

71
Q

What does it mean to “pierce the corporate veil”?

A

To hold shareholders personally liable for corporate debts

Arises due to fraud that implicates the shareholders, often because the corporation was formed for some fraudulent or harmful purpose

72
Q

What factors does a court consider when determining whether to pierce the corporate veil?

A
  • whether the corporation has a bona fide business purpose
  • whether corporate funds and shareholder funds are duly segregated
  • whether the procedures for corporations have been followed (e.g. board meetings)
73
Q

What is another situation which might cause a court to determine whether to pierce the corporate veil?

A

If there is insufficient capital invested to meet the minimum thresholds

74
Q

Under what circumstances might a court hold a parent corporation liable for the debts of its subsidiary?

A

If…

(a) the subsidiary has insufficient capital invested,
(b) the sub’s activities are unduly mixed with the parent’s, or
(c) the sub exists solely for the parent’s sake

75
Q

What can occur if shareholders seek to make loans to a corporation when it is coming into existence?

A

If the corporation is bankrupt (or insufficiently capitalized), the shareholders are not entitled to the increased creditor rights they would have hoped to achieve – instead, insider loans will be treated as capital contributions or made a lower priority than outsider loans

76
Q

Regarding shareholders, what are direct actions and derivative actions?

A

Direct = lawsuits for the shareholder’s benefit

Derivative = lawsuits for the corporation’s benefit (e.g. against a fraudster director)

77
Q

How does straight voting differ from cumulative voting?

A

Straight = shareholders receive one vote per share (this can also be weighted to give multiple votes for certain types of shares)

Cumulative = used when electing directors; shareholders’ votes are multiplied by the number of directors to be elected and can be used however they want (e.g. all for one candidate)

78
Q

Do shareholders have a right to inspect corporate records?

A

Yes, so long as the shareholder can prove that such inspection is related to his interest as a shareholder

79
Q

What are preemptive rights for shareholders?

A

Shareholders with these rights are entitled to purchase any stock that is newly issued before others have the opportunity – though this is done in proportion with their current stock ownership

80
Q

Do stockholders have the right to cause dividends to be declared?

A

Ordinarily no – they can do so only if they can prove to a court that directors have wrongly or arbitrarily refused to declare them

81
Q

Out of what accounts can a corporation pay out dividends?

A

Out of retained earnings (earned surplus) and, in some states, additional paid-in capital (paid-in surplus)

82
Q

What is an absolute majority vote?

A

A vote greater than 50% of all the voters in that class, not merely of all the voters present for a particular meeting

83
Q

Which corporate actions require an absolute majority vote of shareholders?

A

Large changes like a large sale of assets, merger, dissolution, or revision of the articles

The articles can sometimes require a greater proportion than an absolute majority, but that is the default requirement

84
Q

Under what other circumstances is an absolute majority vote needed?

A

An absolute majority of a class of shareholders is needed to modify the rights of that class

85
Q

What is a voting trust?

A

An arrangement where shareholders give their voting rights (but not dividend rights) to a trustee, who has title to the stock and votes in their stead

Requires a trust agreement that must be filed with the corporation, and a copy given to the trustee

Cannot be for longer than ten years

86
Q

What is a pooling agreement?

A

An arrangement where shareholders agree to vote in a particular way

This agreement must be signed and in writing

87
Q

What is proxy?

A

An authorization by a shareholder for someone else (an agent) to vote in his stead

Can be revocable or irrevocable, depending on whether the proxy also has a property or secured interest

88
Q

Does a shareholder have a fiduciary duty towards his corporation?

A

No, he can act primarily in his self-interest

Exception: majority shareholders have a duty towards minority shareholders not to harm them

89
Q

What liabilities does a shareholder bear to his corporation?

A

Besides limited liability, a shareholder can be liable for…

(1) watered stock – liable for the difference between what was paid and par value
(2) unpaid portions of a subscription contract
(3) repaying dividends that were wrongly doled out, even if the shareholder did not know

90
Q

What is the difference between a merger and a consolidation?

A

In both reorganizations, two or more companies become one, but in a merger, one company retains its corporate identity – a consolidation involves the creation of a new corporation

91
Q

What is the required process for a reorganization to occur?

A

(1) directors approve plan
(2) shareholders approve plan (many states require 2/3 absolute majority)
(3) plan is filed with state
(4) state issues certificate

92
Q

What occurs if a shareholder dissents from a reorganization?

A

Statutes provide a process by which he could be entitled to payment for his shares

93
Q

What is a short-form merger?

A

A merger of a substantially owned subsidiary into its parent company – and thus also called a parent-subsidiary merger

The Revised Model Business Corporation Act (RMBCA) provides a simpler process for this kind of merger

94
Q

For a parent-subsidiary merger, what qualifies as “substantially owned”?

A

If the parent has at least 90% of the outstanding stock for each class of stock

95
Q

How is the process for a short-form merger simplified?

A

The plan needs to be approved only by the parent’s directors – not by any shareholders or the sub’s directors

Shareholders can still dissent, however

96
Q

What is a quasi-reorganization?

A

Changing a corporation’s capital structure but not its legal status

Done to remove an accumulated deficit (so it can pay dividends) without the cost of legally reorganizing

97
Q

What are the steps of a quasi-reorganization?

A

(1) revaluing assets at NRV, applying any increase against the deficit
(2) applying the paid-in capital account directly against the deficit
(3) increasing the PIC account through donation or through reducing stocks’ par value

98
Q

How does a voluntary dissolution of a corporation occur, if not by expiration of a time period?

A

(1) vote by directors
(2) vote by shareholders (need absolute majority)
(3) filing a certificate of dissolution with the state court

99
Q

How might an involuntary dissolution of a corporation occur?

A

(1) quo warranto – if the business does not achieve the state requirements for a corporation, the state can act against it to revoke this
(2) shareholders can act for dissolution if the directors commit fraud or harm, or if the corporation cannot be run in the shareholders’ interest (e.g. if the directors are at a standstill on important decisions)

REG (43 decks)

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